On September 7, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued a report about the Internal Revenue Service’s (IRS) Freedom of Information Act (FOIA) procedures. After reviewing a statistically valid sample of FOIA requests, TIGTA concluded that the IRS improperly withheld information 14.3 percent of the time—or approximately 1 in 7 FOIA requests.

TIGTA also found that at the end of Fiscal Year 2016, there were 334 backlogged information requests. Below is a chart from the report showing the IRS’s recent history of backlogged FOIA requests.

TIGTA’s findings are consistent with our experiences with FOIA requests. It is not unusual for the IRS to make repeated requests for extensions to respond. We note further that, during an examination, the IRS is statutorily authorized to provide taxpayers access to their administrative file. Indeed, the Internal Revenue Manual confirms this at section 4.2.5.7 (June 15, 2017). Yet the IRS examination team often requires a FOIA request.

Practice Point 1: As a result of the IRS’s FOIA backlog, some taxpayers have resorted to filing lawsuits in federal district court to enforce their FOIA rights. Because the IRS must respond to court deadlines, taxpayers are sometimes able to force a more expedient response and move to the front of the response line.

Practice Point 2: Taxpayers should attempt to tailor their FOIA requests, only requesting the information in which they are interested. In theory, this could make the IRS’s job easier and, in turn, responses more timely.

Practice Point 3: If taxpayers intend to seek information from the government through the FOIA process, they should do so as soon as possible (e.g., at the beginning of the examination process) so that they may get the information in time to be useful.

We have previously written about QinetiQ U.S. Holdings. Inc.’s (QinetiQ) fight to apply the Administrative Procedure Act (APA) to notices of deficiency issued by the Internal Revenue Service (IRS). (See below for our recent coverage.)

In short, the Tax Court and the US Court of Appeals for the Fourth Circuit rejected QinetiQ’s argument that a one-sentence reason for a deficiency determination contained in a notice of deficiency violated the APA because it was arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.” Undeterred, QinetiQ filed a petition for certiorari seeking review from the Supreme Court. Alas, the saga ends for QinetiQ as the Supreme Court denied the petition this morning.

Practice Point:  Although QinetiQ was not successful in its APA arguments, other APA arguments in the tax law have gained considerable traction in recent years. We will be posting soon on the recent order out of the Western District of Texas invaliding Treas. Reg. § 1.7874-8T on the grounds that this temporary regulations was unlawfully issued without adherence to the APA’s notice-and-comment requirements. Additionally, as we previously noted, other procedural arguments exists when a notice of deficiency contains a minimal explanation, such as potentially shifting the burden of proof to the IRS.

See past coverage:

 

On September 29, 2017, Judge Mark Holmes of the United States Tax Court (Tax Court) issued an order in the estate tax valuation case brought by the Estate of Michael Jackson (the Estate). In the case, the Estate moved to strike the testimony of the Internal Revenue Service’s (IRS) valuation expert witness on the grounds that he lied. The IRS acknowledged that its expert “did not tell the truth when he testified that he did not work on or write a valuation report for the IRS Examination Division in the third-party taxpayer audit.” Apparently, the expert had worked on the valuation of Whitney Houston’s Estate on behalf of the IRS, and failed to list the engagement in his report. He also omitted one publication that he wrote and one case in which he provided expert-witness testimony at a deposition.

The question for the Court was the proper remedy for the omissions, with sanctions ranging from striking all of the expert’s testimony (and thereby depriving the IRS of the only evidence in its favor on the key issues in the case) to discounting the expert’s testimony and weight to be given to his opinions. The Court decided to take the latter route.

The Court explained that striking expert testimony pursuant to Tax Court Practice and Procedure Rule 143(g) (governing expert witness reports) occurs when a putative expert omits information from the report without good cause for the omission. In this case, the Court explained that the IRS’s expert failed to disclose his valuation work on his long list of expert-testimony engagements attached to his resume, but ruled that the omission was merely a “clerical error.” However, the expert did provide false testimony at trial when he testified he did not work on or write a valuation report in the matter involving Whitney Houston’s Estate. The Court determined that there had to be some negative consequences for the expert’s false testimony, and settled on discounting his credibility and opinions.

Practice Point: The order in Estate of Michael Jackson, as well as the Tax Court’s prior opinion in Tucker v. Commissioner, TC Memo. 2017-183, highlight a very important aspect of preparing an expert report for submission in Tax Court: it must be complete and accurate at the time of its submission. It is good practice to run a litigation database search (e.g., Lexis or Westlaw) on your expert’s testimony experience as a check on what the expert has listed in his report.

In two recent cases, the United States Tax Court (Tax Court) has explored the bounds of the anonymity protection afforded to potential whistleblowers under the court’s rules and other authorities. Tax Court Rule 345 relates to privacy protections for filings in whistleblower actions.  Under paragraph (a), a whistleblower may move the court for permission to proceed anonymously.  In order to proceed anonymously, the whistleblower must provide a sufficient, fact-specific basis for anonymity.  Specifically, the Tax Court has held that “[a] whistleblower is permitted to proceed anonymously if the whistleblower presents a sufficient showing of harm that outweighs counterbalancing societal interest in knowing the whistleblower’s identity.”  (Whistleblower 10949-13W v. Commissioner, T.C. Memo 2014-94, at 5).  However, the balance of harm to societal interest may shift as the case progresses, thereby justifying disclosure after anonymity has been granted.  See Tax Court Rule 345(b). Continue Reading Tax Court Requires Specific Factual Showing of Harm for Whistleblower Anonymity

Female tax professionals gathered in McDermott Will & Emery’s New York office for an annual New York rendition of Tax in the City®: A Women’s Tax Roundtable on Thursday, September 14. Featuring a CLE/CPE presentation about Privilege and the Ethics of Social Media by Kristen Hazel and Robin Greenhouse, an update on tax reform by Sandra McGill and an overview of recent state and local tax news by Alysse McLoughlin, the event culminated in a networking reception over cocktails.

Topics covered at the event included:

  • Best practices for preserving attorney-client privilege and work product protection; strategies to prevent an inadvertent waiver.
  • Ethics of social media (think before you post).
  • Tax reform:
    • Where are we now (framework to be issued week of September 25 and legislation sometime in October, possibly after budget).
    • What could tax reform look like (e.g., reduced tax rate, one-time tax on unrepatriated foreign earnings, move to territorial tax with DRD and corresponding changes to foreign tax credit system, changes to IRS Subpart F, elimination of certain deductions and/or adjustments to the taxation of carried interests).
    • What should taxpayers be thinking about (e.g., taking steps to best position your organization to proactively react to tax reform both now and when the reform measures become effective).
  • Status of certain tax regulations identified in Notice 2017-38 per mandate of EO 13789: Treasury provided recommendations to President Trump on September 18, 2017, and its report should be published sometime this month. We discussed possible change/revocation/deferred effective dates for regulations under Sections 367, 385 and 987 and steps taxpayers are taking today to address these regulations.
  • Partnership Update:
    • New TEFRA rules are effective January 1, 2018: TEFRA partnership agreements should be reviewed; assess whether the agreement should be amended (or other agreements implemented) to address these new rules.
    • Grecian Magnesite Mining: Tax Court held that gain derived by foreign person from disposition of its interest in a partnership engaged in US trade or business was treated as the disposition of a capital asset not as the disposition of the partner’s share of the underlying partnership assets and was not subject to US federal income tax as effectively connected income. It is unclear whether this case will be appealed.
  • State tax apportionment issues: We discussed the difficulty in establishing the proper level of reserves due to both the uncertainty in applying the statutory sourcing methods and the state taxing authorities’ ability to use their discretionary authority to revise the statutory sourcing methods.

We invite all tax professionals who identify as female to join Tax in the City®’s official LinkedIn group to continue the conversation and share tax developments in between events and meetings! Click here to join.

Established in 2014 by McDermott Will & Emery LLP, Tax in the City® is a discussion and networking group for women in tax that fosters collaboration and mentorship and facilitates in-person connections and roundtable events around the country. This New York edition of Tax in the City® was the third event this year, and there are two more events in the works—an inaugural Seattle event on October 12, and then an end-of-year event in our Chicago office on December 14.

 

In Ritter v. Commissioner, TC Memo. 2017-185 (September 19, 2017), the Tax Court held that a taxpayer’s receipt of a payment from a section 468B qualified settlement fund (QSF) was includable in gross income for the 2013 taxable year. The QSF was established pursuant to a settlement agreement between a federal banking regulator and the taxpayer’s former mortgage servicer (Bank) in which the Bank agreed to take certain actions to remedy deficiencies and unsafe or unsound practices in (i) the Bank’s residential mortgage servicing and (ii) the Bank’s initiation and handling of foreclosure proceedings. The Bank foreclosed on the taxpayer’s principal residence in 2010 while the taxpayer was in bankruptcy proceedings and protected by federal bankruptcy law. Continue Reading Tax Court Holds Payment from Qualified Settlement Fund is Includable in Taxpayer’s Gross Income

Substantial tax reform is underway and the business community is intently awaiting details of this activity with the aim of positioning themselves to maximize opportunities and minimize any costs or risks that reform may present. How will a cut in the corporate income tax rate, the potential adoption of a “territorial” dividend exemption system or the elimination or altering of recent regulations impact companies?

Continue Reading

Every taxpayer should be aware of the real risk that its own employees could disclose the taxpayer’s confidential and privileged information to the Internal Revenue Service (IRS) for a whistleblower fee. Pursuant to Internal Revenue Code (Code) Section 7623, the IRS is permitted to pay a “whistleblower” who discloses information about a taxpayer who has violated the tax laws. The amount of the payment ranges from 15 to 30 percent of the recovery. We have previously reported about issues pertaining to whistleblowers.

While the flow of information is usually from the whistleblower to the IRS, there is also a risk that the IRS can disclose the taxpayer’s return information to the whistleblower. Code Section 6103(a) deems tax returns and return information as confidential and prohibits the disclosure absent an express statutory exception. Return information is broadly defined and includes the information received by the IRS, from any source, during the course of audit. There are several exceptions to this general rule. For example, Code Section 6103(n) authorizes that tax returns and return information may be shared with the IRS pursuant to a “tax administration contract.” The relevant regulations explain when the IRS may disclose information to a whistleblower and its representative.

A recent memo from the IRS’s Whistleblower Office provides the reasoning behind the IRS decision to enter into a whistleblower contract in order to share the taxpayer’s feeling empowered to share otherwise confidential protected information with whistleblowers. Continue Reading IRS Guidance Says IRS Can Disclose Confidential Taxpayer Information to Whistleblower with Impunity